USD - dropping like a hot potatoe
In November 27th, last year, I wrote about the USD - and the markets when most people saw little hope for Europe, stock markets, and life in general! Then I stated that such a view is deplorable on a personal level and stupid on a professional level. The universe is neither stupid nor given to despondent states of mind!
A Most Important Change
As a Singapore Dollar investor, we had a tough time over the last few years, extracting gains from other markets, while our own currency was going from strength to strength. This situation has seen a major change in September last year. In the aftermath, we learned about its significance from Henderson's Chief Economist, Bill MacQuaker,who described it as “co-ordinated policy responses from Central banks.” Somehow, these guys (the Central Bankers) agreed to support the USD at a higher level, and - thereby reduce currency volatility, which so often causes havoc with investors investment decisions. This, without a doubt, is a major agreement, which has only positive aspects for economies and stock markets globally.
Since then, I managed to outline the resulting performance of the USD versus world currencies rather accurately. The first graph shows my forecast, published in November 27th. In it I stated that I saw a reduction in the currency's volatility, and that it would be trading in a range tilted slightly upward, targeting and going for the 0.81 level, sooner or later.
The second chart shows how closely the tentatively drawn arrows fit the actual chart that developed. The only thing, I was expecting wilder fluctuations, which turned out to be milder. But I also pointed out that reaching the 0.81 level would be the maximum extension, - to stay within the agreement. This is where the move up ended!
Please note, the yellow point shows the time last November. The previously highest points I connected with a horizontal line, indicating that in order for my theory of a higher trading range to be correct this would soon be breached. So it did early in December. The subsequent pullback was demure, which is why, in the following turn, we reached the 0.81 level in mid January already. I consider it too early, because the move has resulted in both indicators I use here creating bearish signals (orange arrows down, versus green arrow up). You can see that at the same time as prices went up, the indicators were closing on LOWER highs. To me, it therefore did not come as a surprise for punters to sell off when targets were reached.
Like all agreements, chances are that it was achieved by extracting varies concessions from each party, reaching compromises on many levels, in return for promises of which there appears to be little know in public. But like all such agreements there will be times when its parameters will be tested, challenged, even trespassed. The third chart on the same USD subject just highlights such a potential scenario.
Not only was the highest level for the USD achieved on the 16th January, we record a cyclical change for the same day, bringing with it a change in sentiment, - and a return into the previous trading range. The pullback of -4% in just 8 trading days was rather sharp, ending exactly on the lower Fibonacci level, which also is the level of the previous double highs before breaking out of the range. This means that we should see a fairly immediate retracement of about 50%, or more till March or so.
And that is necessary, because the SGD / USD ratio went to 1.25, a painful gain of strength, almost 4%, painful, because I believe in order for the 'agreement' to keep its advantages, this was the lowest the USD was to sink against the SGD. Clearly, some will say, it was Fed Chief Bernanke's doing, offering the possibility of more liquidity - at which point the rout apparently started. But the price structure tells us otherwise. At best, it was a good excuse to take home some profits.
PROACTIVE MANAGEMENT ACTIVITY
As all my investors know, we exercised profit taking on January 19 and 20, which were the last trading days before Chinese New Year, - and Singapore shutting down for several days, even longer elsewhere around Asia. So, - no choice there. Some whizkids will argue that we should have waited till Wednesday, 25th Jan because some markets just kept going up. What I saw coming (and they choose to ignore) is that the SGD was gaining strength rapidly, and any further upside would have been negated by that. And when we look at portfolios now, that's exactly what happened for more than 90% of funds we were invested in (backtesting). Another argument: Had I waited till after CNY, we would have had to wait till the second week of February for all transactions to clear! When I have targets for re-entry shortly thereafter, this was too high a risk. I am always grateful for the fantastic cooperation I enjoy with my investors when it comes to processing switches. I do not want to see their goodwill stressed to unnecessary extremes!
The Last Stretch Of The Esoteric Rabbit!
Back to business in the Year of the Water Dragon, we will quickly forget the hapless hopping about of the last year's animal, the Rabbit. Indeed, the last few weeks under the Rabbit were classic examples of its nature: frequent changes in asset classes, hoping from currencies to gold, to treasuries, to Asian bonds, high yields, into large cap equities, then into small caps, and finally into some stock market laggards like Australia, which is at the tail end of all major markets.
Australia
The AORD are now trading in ranges last seen in June 2009, almost 3 years ago! But, - there is another side to it: back in 2009 the AUD was buying only US 75 cents. today it buys US$1.068. So when we look at the index in AUD alone, it does not account for the strong increase of some 40% against the USD (blue mountain chart)!
As Singapore $ investors, this increase is not as relevant, as our currency largely rose with the AUD. (see read line, showing an increase of around 13%). And yet, going forward I would like you to pay attention to some recent changes: in recent weeks the AUD stubbornly traded at the highest point of the range, looking to break above. It looks as though the recent reset in currencies has pushed the AUD above SGD in terms of economic buying power. One major reason for this is of course the interest rate differential in favour of the AUD. In terms of strategy, this means that we must accept the AUD getting stronger once again, vis-a-vis the SGD.
I am excluding the Chinese Mainland stocks from the list, because - we can't really access those as foreign investors, though it does not mean that it is of no significance in the overall assessment of where Asia, and global stock markets are headed.
More about other markets in the next update! Happy Investing.
A Most Important Change
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| SGD / USD - going from strength to strength since 2008 |
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| November 27th forecast |
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| till January 28, 2012 actual price movement |
Please note, the yellow point shows the time last November. The previously highest points I connected with a horizontal line, indicating that in order for my theory of a higher trading range to be correct this would soon be breached. So it did early in December. The subsequent pullback was demure, which is why, in the following turn, we reached the 0.81 level in mid January already. I consider it too early, because the move has resulted in both indicators I use here creating bearish signals (orange arrows down, versus green arrow up). You can see that at the same time as prices went up, the indicators were closing on LOWER highs. To me, it therefore did not come as a surprise for punters to sell off when targets were reached.
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| USD YTD - and the Jan 16th turn |
Not only was the highest level for the USD achieved on the 16th January, we record a cyclical change for the same day, bringing with it a change in sentiment, - and a return into the previous trading range. The pullback of -4% in just 8 trading days was rather sharp, ending exactly on the lower Fibonacci level, which also is the level of the previous double highs before breaking out of the range. This means that we should see a fairly immediate retracement of about 50%, or more till March or so.
And that is necessary, because the SGD / USD ratio went to 1.25, a painful gain of strength, almost 4%, painful, because I believe in order for the 'agreement' to keep its advantages, this was the lowest the USD was to sink against the SGD. Clearly, some will say, it was Fed Chief Bernanke's doing, offering the possibility of more liquidity - at which point the rout apparently started. But the price structure tells us otherwise. At best, it was a good excuse to take home some profits.
PROACTIVE MANAGEMENT ACTIVITY
As all my investors know, we exercised profit taking on January 19 and 20, which were the last trading days before Chinese New Year, - and Singapore shutting down for several days, even longer elsewhere around Asia. So, - no choice there. Some whizkids will argue that we should have waited till Wednesday, 25th Jan because some markets just kept going up. What I saw coming (and they choose to ignore) is that the SGD was gaining strength rapidly, and any further upside would have been negated by that. And when we look at portfolios now, that's exactly what happened for more than 90% of funds we were invested in (backtesting). Another argument: Had I waited till after CNY, we would have had to wait till the second week of February for all transactions to clear! When I have targets for re-entry shortly thereafter, this was too high a risk. I am always grateful for the fantastic cooperation I enjoy with my investors when it comes to processing switches. I do not want to see their goodwill stressed to unnecessary extremes!
The Last Stretch Of The Esoteric Rabbit!
Back to business in the Year of the Water Dragon, we will quickly forget the hapless hopping about of the last year's animal, the Rabbit. Indeed, the last few weeks under the Rabbit were classic examples of its nature: frequent changes in asset classes, hoping from currencies to gold, to treasuries, to Asian bonds, high yields, into large cap equities, then into small caps, and finally into some stock market laggards like Australia, which is at the tail end of all major markets.
Australia
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| Australia's AORD, bringing up the caboose |
 |
| Blue Mountain AUD/USD - Red Line SGD/AUD |
I am excluding the Chinese Mainland stocks from the list, because - we can't really access those as foreign investors, though it does not mean that it is of no significance in the overall assessment of where Asia, and global stock markets are headed.
More about other markets in the next update! Happy Investing.
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